Energy Options in an HJM Framework

It is a delicate matter to trade spot products and financial derivatives in energy markets. Op-
posite to bond and stock markets, the underlying assets are real products and a significant part
of the demand for them represents a real need for the products, which can only be substituted
away with some difficulties or, in some cases, only in a prohibitively costly manner. This is
particularly true in the spot market, where the demand is almost always met, but where the
spot price processes can be quite different from the spot price processes conventionally used in
the pricing of derivatives. This pattern of real demand is also the main reason for the existence
of the well-known convenience yield in energy markets.